In today’s economic climate—where the deal landscape is uncertain, workforce dynamics are shifting, and technology is advancing quickly—private equity leaders are facing a significant challenge: creating value regardless of uncertainty.
The conundrum: As investors grapple with deploying near-record high cash reserves, while at the same generating distributions, the focus on creating real value has never been more critical.
- Over the next 18 to 24 months, buyers and sellers will return to the deal table with greater frequency and increased urgency, making it imperative for firms to defend and enhance their valuations effectively.
- To achieve returns close to historical benchmarks and to satisfy limited partners’ expectations, general partners must revisit and refine their value creation strategies.
Reality check: Strategies developed a year or more ago may now be outdated, underscoring the need for businesses to adapt swiftly to foster sustainable, long-term growth. Let’s look at how to do that.
Creating sustainable and resilient value begins at the grassroots level. Embedding value management principles into an organization’s core activities—such as strategic planning, goal setting, capital allocation, risk evaluation, incentive structures, and performance reviews—is essential. Leaders that methodically address these areas will secure a competitive edge, prevent stagnation, and position their businesses for breakout growth.
To drive real value, focus on four critical drivers: growth, operational efficiency, technology enablement, and talent management.
1. Top-line revenue growth
Most enterprises are in a constant state of seeking growth, which is often characterized by ambitious expansion and scaling efforts. But, planning must precede action, goals must be set, and progress must be regularly reviewed.
Look before you leap: Biases toward action can be strong, and are traits often associated with winning organizations. However, building a sales team, standing up a channel partner program, launching a new advertising campaign, or bringing a new product to market without first applying a strategic lens, carefully weighing opportunities and risks, and evaluating return on investment can be a recipe for disaster. Countless organizations, for example, have hired a sales leader without first achieving sufficient product-market fit—finding out later that they actually needed someone with different credentials, and then having to perform a costly reset in terms of time and money wasted.
Measure what matters: Initiatives without goals are less likely to succeed. As part of the planning process, determine what success looks like—and ensure it’s both specific and measurable. To begin, limit the set of key performance indicators (KPIs) to three, and set regular intervals to review results and make data-driven decisions—including whether other KPIs should be substituted or added. Sales-related KPIs could include new qualified leads, new bookings, average deal size, sales cycle, conversion rate, and customer acquisition cost, among others. As needed, customer relationship management systems (CRMs) should be configured to capture relevant data and surface such KPIs, and employees should be trained and enabled to provide relevant inputs.
Ruthlessly execute: Vision and strategic planning are only half of the success equation— execution is the other, arguably more important, half of the equation. Value creation plans should identify key initiatives and executive sponsors responsible for each and should identify one or more workstreams with individuals tasked with execution. Key milestones and deadlines should be set too. Progress should be reviewed regularly, including whether pivots are needed. Dashboards and scorecards should be utilized as monitoring tools.
2. Operational efficiency
Top-line revenue growth alone may not be enough to generate real, long-term value—especially as “growth at all costs” strategies fall out of favor. As a company develops its growth strategy, it’s imperative to consider the impact of growth on margins. Creating sustainable, and profitable, growth requires a nuanced balance between strategic expansion and efficient operational management, informed by precise oversight of both investments and expenses.
Improve efficiency, improve margins: In pursuit of growth, companies must be keenly focused on efficiency to protect and grow their margins. Unchecked expansion can lead to increased operational costs and ultimately diminished returns. In practice, this means developing a comprehensive financial strategy that includes budgeting, forecasting, and ongoing fiscal management—and investments in the right people and technologies needed to execute the strategy.
Mind the gaps: Strategic growth requires identifying problems to solve, determining market opportunities associated with alleviating related customer pain, and bringing to market solutions that are profitable to deliver. When determining true profitability, leaders must consider all facets of how solutions will be sold and delivered. Otherwise, the risk of misalignment and inefficiency increases significantly. Back office and other operational costs should be considered too, including, for example, whether a solution configuration/ customization strains the sales, legal, finance, or accounting departments.
Customer-centric scale: As companies grow, they face the challenge of scaling their operations to meet increased demand while maintaining quality and service standards. This requires strategic foresight, optimizing processes, leveraging technology and AI, creating strategic alliances, and ensuring that supply chains are strong yet flexible. Through growth and change, leading organizations ensure that customers and the customer experience remain front and center. Regular surveys and other mechanisms designed to gauge customer sentiment must be utilized.
Combining strategic growth with operational efficiency and expense management enables companies to meet their growth objectives while ensuring resilience and financial stability.
3. Harnessing technology
The landscape has been revolutionized by technological advancements—not available even a decade ago— such as AI, robotics, and advanced data automation. While these innovations hold immense promise for boosting revenue and improving operational efficiency, optimizing their use remains both necessary and challenging. For companies that are performing well, but not yet fully realizing their full potential, integrating these tools can be a game-changer.
Enable for scale: Investing in technology alone isn’t enough for value creation—success here too depends on a solid strategy and effective execution. Start by looking for organizational challenges, including structures, processes, and workflows that may have manual components or other bottlenecks. Professional services businesses, for example, can and should tech enable the assembly of client deliverables. By committing tech resources to addressing organizational challenges, and aligning deployment with strategic objectives, companies can improve their margins and achieve their potential.
Differentiate to win: Winning organizations offer solutions that are differentiated in the marketplace, solve very specific customer pain points, and have clear and defensible value propositions. Adding SaaS solutions to the portfolio, built in-house or via M&A, can transform an organization’s market position or lead them into adjacent or entirely new markets—and supercharge cross-sell initiatives in the process. Likewise, tech-enabling services can offer a discernable edge over the competition.
Consider artificial intelligence: Business leaders must consider how AI might disrupt their operations, business models, and market position—for better or worse. Where business cases exist for leveraging AI, companies must ensure they have high-quality data and a solid gameplan for using it. This means developing strong data management practices and investing in infrastructure to create integrated, AI-ready data systems. Recent surveys found that nearly 85% of GPs expect that over the next five plus years AI will have a significant impact on the way they do business yet only 4% of CEOs interviewed said they were leading when it came to the maturity of their AI strategy. [i] This underscores the need for both strategic planning and practical execution to fully tap into AI’s value-creating power.
4. Human capital
With longer holding periods and a growing need for specialized skills, private equity leaders must ensure their portfolio companies continuously reevaluate how they attract, empower, manage, and retain their workforce.
Effective talent management goes beyond simply filling roles, it involves placing the right talent in the right roles, and equipping teams with the tools, training, and support to excel.
Meet the workforce where they are: In the new normal, successful talent acquisition and management means offering more compelling employee value propositions than in years past. It requires competitive compensation, flexible work arrangements that promote wellbeing and acknowledge family commitments, greater opportunity for professional development, and transparent requirements for advancement. Additionally, companies that can clearly evidence a commitment to the greater good can better position themselves to appeal to a deeper pool of talent.
Pay for performance: Incentive compensation should be performance based and, where possible, formulaic. Compensation plans should align with company goals and should incentivize desired behaviors. As part of the plan design process, limit the set of variable pay levers to two or three—because if every company goal is a priority then none of them are a priority—and ensure they are tied to company goals for which the individual can control or influence the outcome. Pay curves and multipliers can be factored into comp plans to provide upside and allow individuals to further participate in the value they help create. Ultimate alignment and an ownership mindset can be achieved through option, equity, and other grants that provide ownership stakes.
Develop high-powered management: Long-term value creation depends on prioritizing the development of high-performing, people-centric management teams by fostering agile and forward-thinking leadership. This involves nurturing leaders who are empathetic, adaptable, committed to continuous learning, and focused on creating a people-centric culture. Great management can be an organizational superpower that accelerates value creation in support of long-term growth.
The final word: Developing and executing a value creation strategy is not a one-and-done effort.
- Value creation is an ongoing pursuit that demands a blend of strategic foresight and operational diligence.
- Moreover, continuous performance assessment and improvement is key to unlocking efficiencies and driving long-term value.
- Value creation requires leadership that embraces continuous learning and adaptation, critical in today’s rapidly advancing market landscape.
Go deeper: Stay tuned for the final article in this series, in which we’ll speak directly with value creation experts who will share insights, successes, dand challenges from real engagements in which they partnered with clients to create transformative growth.
[i] EY. EY How the Drivers of Private Equity Value Creation are Changing